Unlike employees, contractors and sole proprietorships need to pay quarterly taxes.
In this article we will show you what quarterly taxes are, we’ll talk about the difference between paying taxes and filing taxes, and you will learn step by step how to pay your quarterly taxes.
Additionally, we will tell you how you can get the money you need to pay your small business taxes.
What are quarterly taxes?
If you receive income that is not subject to any withholdings, you need to pay quarterly taxes to the Internal Revenue Service. The professionals that need to do this are contractors, sole proprietorships, landlords and investors.
According to the IRS, whoever owes at least $1,000 in federal income taxes during the year, even after accounting for their withholdings and refundable credits, needs to pay quarterly taxes too.
If your withholding and refundable credits cover less than 90% of your tax liability this year or do not reach 100% of the amount of last year’s tax obligation, you also have to pay estimated quarterly taxes.
What is the difference between filing taxes and paying taxes?
By filing taxes, you calculate your tax obligations, taking into account your income, your expenses and other factors, such as loans and debts.
Also, when filing your taxes you decide how you’re going to pay what you owe. Filing taxes is mandatory. Not filing or paying taxes can have serious consequences. Even if it seems contradictory, it is more serious not to declare them than not to pay them.
If you do not declare on time, the fine for not filing your return is 5% of the taxes owed for each month of delay, and in some cases, the penalty can reach up to 25%.
If you file your taxes but do not pay them, the IRS may fine you for default. However, the fine is not as high, as it generally amounts to 0.5% of the taxes you owe for each month of delay. Although sometimes this figure can also reach 25%.
Most taxes are paid through payroll deductions. This money is withheld or taken from the workers’ salary before receiving the paycheck. As already mentioned, independent employees, sole proprietorships and anyone who is not subject to any withholdings must pay quarterly taxes.
Many people and businesses pay more taxes than what they need tor, so they receive a refund after filing their return.
How to pay quarterly taxes in 5 steps
Below, you’ll find everything you need to know to pay your quarterly taxes. Remember that as an independent employee or a small business owner you must pay this tax or you will face trouble with the IRS.
1. Make sure your records are up to date
Before paying your quarterly taxes you need to know how much you owe. Only if your records show updated data on your income and expenses, can you accurately calculate how much you need to pay.
Ideally, you should update your accounting records at least once a month. That way you won’t get stressed trying to find all your information before the deadline.
2. Prepare your profit and loss statement
A profit and loss statement is a report that summarizes the profits, costs, and expenses of a business during a certain period, such as a quarter or a fiscal year.
This report is also known as a profit statement, and it can show if a company is capable of generating profits by increasing its revenues or reducing its costs. When preparing this statement, make sure the dates match the quarter you are going to pay.
This report is key to calculate how much you owe.
3. Calculate your tax obligation
To know how much money you must pay each quarter, you need to calculate the expected adjusted gross income, taxable income, and deductions for the year. To make your calculations, you can use the results of the previous year.
Finally, you have to divide the result by four to know how much you should pay each quarter.
It’s better if your estimates are more than what you actually need to pay. This is because that extra can be refunded, and if you pay less than what you owe, you could be fined for making an insufficient payment.
4. Choose the payment method
You need to choose how you want to pay the taxes you owe. The IRS has several payment methods:
- Send a check along with form 1040-ES.
- Make a bank transfer or use a credit card. The transfer is free, but paying with a card incurs in fees.
- Use the IRS’ Direct Pay. This free platform supports payments with debit and credit cards, but when using the latter you will be charged a fee.
5. Save your receipt and verify that your payment was made
When you have finished paying, print the receipt, and, just in case, save a screenshot of the payment confirmation. Include this information in your records.
How to get the money to pay your quarterly taxes
If you have problems with your business’ cash flow and don’t have enough funds to pay your quarterly taxes, there are several ways to get it so that you can avoid fines and other penalties:
Pay with your credit card
It’s usually never a good idea to replace one debt with another, but sometimes it is the only option. If you don’t have the money to pay your business taxes on time, use a business credit card.
The IRS accepts credit cards. However, you may have to pay additional fees to the card issuer.
Ideally, turn to a lender who can approve your application, and deposit the money in your account quickly. But, like with a credit card, you need to calculate how much you have to pay in interest and fees and consider how debt can affect your business finances.
If your debt to the IRS is not very high, you do not have to pay a lot of interest, and you can return the money quickly, you should apply for a loan.
Other alternatives to getting your tax money include using your savings or borrowing from your friends or family.
Don’t forget to pay your quarterly taxes
Paying quarterly taxes is an unavoidable obligation for sole proprietorships, independent workers, and for anyone who has no income withholdings.
Filing taxes means organizing all your records to calculate, according to your income and expenses, how much you owe the IRS. After collecting all the information and making the estimates, taxes are paid by payroll deductions, in the case of employees, or directly to the IRS if you are a freelancer.
Ordering your records, calculating how much you owe, and choosing a payment method are part of the process you must follow to pay your quarterly taxes.
If for some reason you do not have enough money to assume your debt, do not worry, a loan, a credit card or your relatives can get you out of trouble.
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